Case Law Details
Standard Industries Limited Vs DCIT (Bombay High Court)
Bombay High Court held that reopening of assessment under section 148 in absence of any new information received by AO between the date of assessment order u/s 143(3) till the issuance of notice u/s 148 is unjustified and untenable in law.
Facts- The petitioner among others is engaged in the business of trading in the textile goods as also in real estate development. The petitioner owned a free-hold land at Sewree on which it was entitled to transferable development rights (TDR) as per the Development Control Regulations for Greater Mumbai, 1991.
The case of the petitioner is that the revenue from the sale of the TDR was treated as business income and were accordingly offered to tax in the return of income for the assessment year 2012-13, which was selected for scrutiny under order of assessment under section 143(3) of the Act. It was further stated that in the return of income from the assessment year 2014-15, the loss resulting from the reversal of the sale of TDR was treated as the business loss and the deduction thereof was claimed under section 28 of the Act. The return was selected for scrutiny for the assessment year 2014-15, during the course of which the respondent made enquiries into cancellation of TDR sale.
The order of assessment under section 143(3) came to be passed. Subsequently, AO issued notice u/s 148 seeking to reopen the assessment of the AY 2014-15.
Conclusion- In our opinion, therefore, there was no failure on the part of the petitioner to disclose fully and truly any material fact to the AO relevant to the assessment year 2015-16. An order of assessment under section 143(3) having been passed must be deemed to have been passed after considering all material facts.
It is, thus, clear that no new information was received by the AO between the date of the order of assessment under section 143(3) till the issuance of the notice impugned under section 148 of the Act.
We have no hesitation in holding that both the jurisdictional conditions had not been satisfied by the AO in the reasons recorded on the touchstone of section 147 of the Act.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. The petitioner among others is engaged in the business of trading in the textile goods as also in real estate development. The petitioner owned a free-hold land at Sewree on which it was entitled to transferable development rights (hereinafter referred to as ‘TDR’) as per the Development Control Regulations for Greater Mumbai, 1991.
2. The petitioner claims that it entered into a Memorandum of Understating (‘MOU’) with Stan Plaza Limited, a wholly owned subsidiary of the petitioner, whereby the petitioner agreed to transfer its TDR to its subsidiaries. As per the terms of the MOU, the petitioner was required to obtain a Development Right Certifcate (DRC) in the name of the subsidiary failing which the MOU was to stand cancelled. The petitioner claimed that it was unable to obtain the said DRC within the stipulated period and that finally the MOU was terminated vide Deed of Cancellation dated 18th March 2014. Consequently, the sale of TDR aggregating to Rs.403.80 Lakh which was shown as business income in the accounts for the year ended 31st March 2012 was reversed by the petitioner in its books of account and the reversal shown and disclosed on the face of the statement of profit and loss as well as in the Cash Flow Statement for the year ended 31st March 2014. A detailed note explaining the circumstances leading to the said reversal was also given in note No.25 forming a part of the financial statement for the year ended 31st March 2014.
3. The case of the petitioner is that the revenue from the sale of the TDR was treated as business income and were accordingly offered to tax in the return of income for the assessment year 2012-13, which was selected for scrutiny under order of assessment under section 143(3) of the Act. It is further stated that in the return of income from the assessment year 2014-15, the loss resulting from the reversal of the sale of TDR was treated as the business loss and the deduction thereof was claimed under section 28 of the Act. The claim of such loss as a deduction from business income was specifically disclosed in the return of income and profit and loss account for the assessment year 2014-15. It is stated that during the course of assessment proceedings for the assessment year 2014-15, the petitioner had, along with return of income, also furnished the audited financial statements. The return was selected for scrutiny for the assessment year 2014-15, during the course of which the respondent No.1 made enquiries into cancellation of TDR sale. A reference in this regard was made to a communication, dated 11th March 2015 issued by the petitioner to the AO which communication is on record. According to this communication, the petitioner appears to have explained the basis for valuation/consideration reserving the transferable development rights and the reasons for cancellation of the MOU to the AO. For purposes of reference, the communication dated 11th March 2015 is partially reproduced hereunder :
We refer to the ongoing assessment proceedings under section 143(3) of the Income Tax Act, 1961 (‘the Act’) and in continuation of the submission filed on 1 November 2013, 2 March 2015 and 9 March 2015 (copies enclosed at Annexure I), we enclose details as under :
A Basis for valuation/consideration vis-à-vis Transferable Development Rights (TDR)
1. We refer to our submission dated 9 March 2015, in this regard we would like to mention that a signed Memorandum of Understanding (MOU) 26 March 2012 with Stan Plaza Limited (SPL) is cancelled in the financial year 2013-14 and the company has reversed the amount offered for tax during the financial year 2013-14.
2. The reason for cancellation of the MOU are as under : As per the terms of the MOU, the Company, within three months of the date of the MOU, was required to obtain the Development Rights Certificate (DRC)
…………………….”
4. At this stage, it would also be necessary to mention that learned counsel Mr.Niraj Seth took pains to take us through the income tax return in ITR Form 6 with a view to refect the entry with regard to reversal of sale of transferable development rights, as also communication dated 16th September 2015, by virtue of which the petitioner had submitted copies of the audited financial statements to the AO along with tax audit report issued under section 44AB of the Act in response to the notice dated 28th August 2015 issued under section 143 of the Act. The petitioner also referred to the auditor’s report with a view to emphasize that the entry with regard to reversal of sale of TDR was very much referred to and explained in detailed in the notes attached to the Auditor’s report. In that background, it appears that the order of assessment under section 143(3) came to be passed on 2nd December 2016 .
5. Subsequently, the AO on 26th March 2021 issued a notice under section 148 of the Act seeking to reopen the assessment of the assessment year 2014-15 on the ground that income had escaped income within the meaning of section 147 of the Act. The reasons for reopening as furnished to the petitioner read as under :
In this case, assessment for AY 2-14-15 was completed on 02.12.2016 accepting the returned loss of Rs.11,83,03,084/-.
As per provisions of section 37(1) of the IT Act, any expenditure incurred by a person, not being in the nature of capital expenditure laid out wholly and exclusively for the purposes of business, shall be allowed as deduction.
It is observed from the note 25(m) attached to annual accounts that assessee company has reversed sale of TDR aggregating Rs.403.80 lakhs in the profit and loss accounts. Further, on perusal of the notes to annual accounts shown assessee company was holding free hold land at Sewree, Mumbai, was part of the land on which the company operated cotton textile mill in earlier years. The assessee company entered into MOU in March, 2012 with a subsidiary company for transfer of TDR on above referred plot. The company followed up its application for FSI with Municipal Authorities, however, could not get the same. Accordingly, it got cancelled MOU deed in March, 2014 and the assessee reversed the sale of TDRof Rs.403.80 lakhs. Since, the plot of land was part of factory which was used for the business purpose by the assessee, any transaction related to same, i.e., sale will be capital item and not revenue item. Similarly, any reversal of sale of TDR on this plot will be capital in nature and will not be allowable as deduction in profit and loss account. Considering the above, the claim of the assessee is not in order and therefore the claim of incorrect expenditure being capital in nature resulted in underassessment of income to that extent and the same has escaped assessment.
3 Considering the above, it is clear that the assessee company has not disclosed the full and true material in the return of income filed and therefore, the condition specified in the proviso to section 147 are fulfilled. It is pertinent to mentioned here that even though the assessee has e-filed the audited P & L Account and Balance Sheet or other details/schedules, the requisite material facts as noted above in the reasons for reopening were embedded in such a manner that material evidence could not be discovered with due diligence. For the above reasons, it is not a case of change of opinion. Therefore, I am satisfied that the assessee had failed to disclose fully and truly all material facts necessary for its assessment for the assessment year under consideration.
4In view of the above, it is a fit case for initiation of proceedings u/s.147 of Income Tax Act, 1961, in order to frame proper assessment to bring to tax appropriate income attributable to the above, which has escaped assessment.
6. Objections to reopening were filed by the petitioner in which it was highlighted that the basis of reopening recorded in the reasons had already been gone into during the regular assessment proceedings under section 143(3) of the Act and therefore, it was stated that the reopening was nothing but a change of opinion. The AO then appears to have sought confirmation from the assessee vide communication dated 9th January 2022 asking the petitioner to furnish documentary evidence that the issue had been specifically raised and dealt with during the original assessment proceedings.
7. The petitioner, in response, addressed a communication dated 24th January 2022 whereby reference was made to the communication dated 11th March 2015 which had been addressed to the AO during the regular assessment proceedings. A copy of the said communication was also furnished to the AO. However, the AO was not satisfied with the explanation so tendered and vide communication dated 9th April 2022, rejected the plea of the petitioner on the ground that there was no documentary evidence whatsoever that ‘the issue of TDR was discussed during the original assessment proceedings under section 143(3) of the Act and that a mere statement that it was discussed would not establish the said fact. By rejecting the argument of the petitioner in the aforementioned manner, the AO held that the reassessment proceedings could not be said to be a ‘change of opinion’.
8. In the present case, since the assessment is sought to be reopened beyond the period of four years in a case where an order of assessment was passed under section 143(3) of the Act, the AO was required to satisfy the jurisdictional conditions, I.e., firstly on the basis of his reasons to believe that income chargeable to tax had escaped assessment and secondly, that there was failure on the part of the petitioner to disclose fully and truly all material facts necessary for reassessment during the original assessment proceedings.
9. Counsel for the petitioner stated that both the jurisdictional conditions have not been met with by the AO, whereas counsel for the revenue supported the view expressed by the AO, based upon the reasons recorded, and the reply affidavit filed in support of the reopening of the assessment.
10. In Hindustan Lever Ltd. V/s. R. B. Wadkar, Assistant Commissioner of Income-Tax and Ors. 1, it was held that in the reasons recorded, the AO must disclose as to what was that fact or material which was not disclosed by the assessee fully and truly which was necessary for assessment so as to establish the the vital link between the reasons and evidence. It was held :
“….. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment.
11. In the present case, it can be seen that while the AO has made a plain statement that there was failure to disclose fully and truly the material facts, yet the AO has neither disclosed nor identified as to what were those material facts which were not disclosed in the earlier assessment proceedings. The AO, on the other hand, did record in the reasons that the assessee had filed audited profit and loss account, balance-sheet and other details/schedules, however, short of admitting that the details with regard to reversed sale of TDR had been refected in the aforementioned documents and the return, proceeded to take shelter behind a non-existent excuse that the material facts were embedded in such a manner that the same could not be discovered with due diligence. It is difficult to accept this plea inasmuch as all these details were contained in the return of income in the audited accounts and profit and loss statement, also explained in the notes attached to the auditor’s report, besides the communication dated 11th March 2015 issued by the AO pursuant to which the order of assessment under section 143(3) came to be passed.
12. In our opinion, therefore, there was no failure on the part of the petitioner to disclose fully and truly any material fact to the AO relevant to the assessment year 2015-16. An order of assessment under section 143(3) having been passed must be deemed to have been passed after considering all material facts in regard to the queries raised which stood duly answered in terms of the judgment of the Full Bench decision of Delhi High Court in Commissioner of Income-tax Vs. Kelvinator of India Ltd.2. In the said judgment, the Full Bench of Delhi High Court held :
“ We also cannot accept submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded on analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act the judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without anything further, the same would amount to giving premium to an authority exercising quasi- judicial function to take benefit of its own wrong.”
13. The second argument of learned counsel for the petitioner was that there was no basis for the reason to believe and that in fact this was a case of ‘change of opinion’ as there was no tangible material with the AO for his reason to believe that income had escaped assessment for the said assessment year. It was stated that there was no new information received by the AO and reference was made to the notes attached to the annual accounts submitted by the assessee-company for the purposes of reopening. It is, thus, clear that no new information was received by the AO between the date of the order of assessment under section 143(3) till the issuance of the notice impugned under section 148 of the Act. Therefore, the ratio of the judgment in Jindal Photo Films Ltd. Vs. Deputy Commissioner of Income Tax 3 would squarely apply. In this case, it was held :
“……… all that the Income-tax Officer has said is that he was not right in allowing deduction under Section 80I because he had allowed the deductions wrongly and, therefore, he was of the opinion that the income had escaped assessment. Though he has used the phrase “reason to believe” in his order, admittedly, between the date of the orders of assessment sought to be reopened and the date of forming of opinion by the Income-tax Officer nothing new has happened. There is no change of law. No new material has come on record. No information has been received. It is merely a fresh application of mind by the same Assessing Officer to the same set of facts. While passing the original orders of assessment the order dated February 28, 1994, passed by the Commissioner of Income-tax (Appeals) was before the Assessing Officer. That order stands till today. What the Assessing Office has said about the order of the Commissioner of Income-tax (Appeals) while recording reasons under Section 147 he could have said even in the original orders of assessment. Thus, it is a case of mere change of opinion which does not provide jurisdiction to the Assessing Officer to initiate proceedings under Section 147 of the Act.
It is also equally well settled that if a notice under Section 148 has been issued without the jurisdictional foundation under Section 147 being available to the Assessing Officer, the notice and the subsequent proceedings will be without jurisdiction, liable to be struck down in exercise of writ jurisdiction of this court. If “reason to believe” be available, the writ court will not exercise its power of judicial review to go into the sufficiency or adequacy of the material available. However, the present one is not a case of testing the sufficiency of material available. It is a case of absence of material and hence the absence of jurisdiction in the Assessing Officer to initiate the proceedings under Section 147/148 of the Act.”
14. The Apex Court in Commissioner of Income Tax V/s. Kelvinator of India Ltd.4 held that there was a difference between ‘power to review’ and ‘power to reassess’ under section 147 and that the AO had no power to review and that, if the concept of ‘change of opinion’ was removed, then, in the garb of reopening of the assessment, a review would take place. It was held :
“ ….The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain precondition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989, Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.”
15. Be that as it may, we have no hesitation in holding that both the jurisdictional conditions had not been satisfied by the AO in the reasons recorded on the touchstone of section 147 of the Act and the ratio of the judgments mentioned hereinabove.
16. Be that as it may, the petition is allowed. The order impugned in the present petition, dated 9th February 2022 rejecting the objections of the petitioner, as also the impugned notice dated 26th March 2021 under section 148 of the Act are held to be unsustainable and are accordingly set aside.
Notes:-
1 2004 ITR 332 Vol.268.
2 [2002] 123 Taxman 433 (Delhi)
3 [1998] 234 ITR 170 (Delhi)
4 [ 320) ITR 561 SC
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